The strategic group map for the energy/sports drink category should focus along the axes of energy and sport. An energy drink is basically a caffeine/sugar bomb, intended to provide a burst of energy and alertness. A sports drink tends to also have a lot of sugar, but not necessarily caffeine, and instead will have salt as a means of boosting electrolytes. Thus, the two categories can be quite a bit different from one another, but can also have some overlap. My strategic group map looks at how the industry is structured along these two axes (Ketchen & Short, 2014).
A drink that has no caffeine but focused on electrolytes and sugar would be viewed as a sport drink, in the upper right quadrant. Examples would be Gatorade, Powerade, and numerous other knockoffs thereof. In the lower left quadrant are the energy drinks that include the likes of Monster and Red Bull. Along the strategic map there are outliers. For example, Mountain Dew has a lot of caffeine and a lot of sugar, fitting the mold of an energy drink, but lies more in the upper left quadrant, somewhere in between a soda and an energy drink. The lower right quadrant lacks attributes of energy drinks, but also lacks elements of sports drinks, but still has some benefit as a sport drink. Water is a good example here — used by many as a sports beverage but without the typical attributes of other products in the category. So the map shows sports and energy drinks, with beverages in the middle of the chart capable of being both, with substitutes as outliers on the continuum.
There are several key factors that drive success in these alternative beverage categories. Marketing is critical. Companies that have developed a brand name, in particular the ones with first-mover advantage, have been able to build out their market share. Two early entrants, Red Bull and Monster, dominate the category, illustrating the value of getting into the business early. Latecomers typically either seek out a niche (i.e. VPX Redline) or they struggle as industry also-rans (i.e. Full Throttle) (Caffeine Informer, 2014).
One key success driver besides successful marketing and the ability to create a powerful brand story, is distribution. For a new product, getting distribution is a challenge because of the number of players already in the market. A success here is 5-Hour Energy, which gained distribution with a different bottling format. But other new entrants have typically been owned by major beverage companies, as a means of getting into stores. Without distribution, nobody can buy the product, and there will not be economies of scale in production. If we look at the recent strong new entrants like NOS, which is increasing sales at a time when most secondary brands are losing sales, NOS is owned by Coca-Cola (Ibid.).
For sports drinks, taste matters. That is not really the case in energy drinks, which tend to taste medicinal and not very appealing. But for sports drinks, with their fruity flavors, having a taste that is agreeable to the consumer’s palate is important. Here, thought, having an established brand, good distribution and some marketing capabilities are all key success factors, which is why the brands that dominate the industry are the ones that have been around a long time. One important thing to note is that if the company has the money to market heavily, that will help immensely in securing distribution, because if offers retailers certainty that the product will sell — marketing support is critical for a new product to get shelf space.
Coca-Cola has added Monster to its energy drink stable, and that is about what I would have recommended. It was necessary, if Coke was to get serious about energy drinks, to acquire a brand, since building one via NOS was taking forever. Coca-Cola also owns Powerade, which means that it has the #2 brand in each category. It may not be able to overtake the market leaders in either category, but Coca-Cola has the resources to gradually win more market share, either from those leaders or from the also-rans.
PepsiCo is dominant in sports drinks with Gatorade, except in Tallahassee, but has no meaningful presence in energy drinks. Gatorade alone is worth nearly $6 billion in annual revenue, bigger than Red Bull (Euromonitor, 2014). It is recommended therefore that Pepsi seek to buy out either Red Bull or Rockstar in order to gain a more serious foothold in the energy drink business, which seems to have left PepsiCo in the dust. The company perhaps has not envisioned it becoming a billion dollar business, yet with its distribution Rockstar could easily pass that number.
Red Bull owns the energy drink segment, as the market leader in the U.S. And a runaway market leader globally. However, the company has struggled with brand extensions, only developing a handful but never really getting too far away from the basic formula. This puts Red Bull at risk in the long run, because it has a great distribution network and should diversify its holdings in order to secure against a loss of market share in the future. Should Red Bull or the energy drink category in general fall out of fashion, it would have nothing to fall back on. Thus, Red Bull will eventually need to choose if it wants to be a part of Pepsi (or Coke, maybe), or if it wants to leverage its marketing and distribution muscle to build out a portfolio of brands, perhaps by straddling the line between energy drink and sports drink.
Ketchen, D. & Short, J. (2014). Mastering strategic management 2.0. Flat World Knowledge. Retrieved November 16, 2014 from http://catalog.flatworldknowledge.com/bookhub/reader/3085?e=ketchen_1.0-ch03_s04
Caffeine Informer. (2014). Top selling energy drinks. Caffeine Informer. Retrieved November 16, 2014 from http://www.caffeineinformer.com/the-15-top-energy-drink-brands
Euromonitor (2014). Sports and energy drinks in the U.S. Euromonitor. Retrieved November 16, 2014 from http://www.euromonitor.com/sports-and-energy-drinks-in-the-us/report
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